Application of Rule 3 of the Electricity Rules, 2005 for Electricity Tax Held Illegal | Madras High Court Quashes Demand Notice on Captive Power Plant
Safiya Malik
The High Court of Madras Single Bench of Justice N. Anand Venkatesh held that the demand for electricity tax issued by the respondents based on Rule 3 of the Electricity Rules, 2005, was illegal and beyond the jurisdiction conferred upon them under the State Act. The Court quashed the impugned demand notice issued by the fourth respondent and restrained the respondents from levying or collecting electricity tax based on the criteria set out in the Central Rules, specifically the requirement of 51% captive consumption.
The Court stated that the respondents' reliance on the Central Rules to raise a tax demand under a state legislation was unsustainable in law. The judicial directive clarified that the power to impose electricity tax emanates solely from the Tamil Nadu Tax on Consumption or Sale of Electricity Act, 2003, and the Rules framed thereunder, which do not incorporate the 51% captive consumption requirement. Consequently, the demand issued under the Central Rules was held to be without legal basis and violative of the legislative competence doctrine. The writ petition was allowed, and the impugned demand notice was set aside with liberty to the authorities to act under the State law if so warranted.
The petitioner in the case, a manufacturing entity engaged in producing carbon black, operates a captive power generation plant using steam from specially designed boilers. The electricity so generated is partially utilized for the petitioner’s internal consumption, including the operation of the captive power plant itself, and the surplus is sold to the Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO).
A demand notice dated 23.8.2012 was issued by the fourth respondent (Electrical Inspector, Kancheepuram North Division) seeking a payment of Rs.19,16,709/- as electricity tax shortfall for the period from 2005 to 2006. The notice was predicated upon the ground that the petitioner had not met the requirement under Rule 3 of the Electricity Rules, 2005, which mandates that not less than 51% of the electricity generated by a captive power plant should be consumed for captive purposes.
The petitioner challenged the legality of this demand, asserting that Rule 3 of the Central Rules cannot be the basis for levying electricity tax under the State's taxation framework. The petitioner argued that the electricity tax is governed by the Tamil Nadu Tax on Consumption or Sale of Electricity Act, 2003, and the Tamil Nadu Tax on Consumption or Sale of Electricity Rules, 2003, neither of which impose a 51% captive consumption requirement. The petitioner further submitted a reply to the demand notice on 22.4.2011 reiterating the same position.
Notwithstanding the reply, the fourth respondent reiterated the demand via communication dated 23.8.2012. Challenging this, the petitioner filed the writ petition seeking a Writ of Certiorarified Mandamus to quash the impugned notice and to restrain the respondents from imposing tax using the provisions of Rule 3 of the Central Rules.
An interim stay on the impugned demand was granted by the High Court on 12.2.2013, which was subsequently extended and later made absolute by the Court on 5.7.2018.
Respondents 1, 3, and 4, in their initial counter filed on 01.3.2017 in support of their petition to vacate the stay (WMP.No.1677 of 2018), admitted that the Central Rules were formulated to carry out the provisions of the Electricity Act, 2003 and did not extend to impose obligations under the State legislation. The initial counter acknowledged that the State Act did not include a provision mandating 51% captive consumption for classification as a captive generating plant.
The respondents referred to G.O.Ms.No.48 Energy (A1) Department dated 22.4.1998, which recognized the status of the petitioner as a captive power plant and stipulated the terms for power purchase by TANGEDCO. It was contended that the petitioner's status as a captive generator could not be revoked based on subsequent amendments made under the Central Rules.
Subsequently, an additional counter-affidavit was filed by the fourth respondent on 15.6.2023, on behalf of respondents 1 and 3. In this filing, the respondents changed their position and attempted to justify the demand by invoking the doctrine of pith and substance, arguing that the Central Rules validly imposed a requirement of 51% captive consumption. They submitted that Rule 3 of the Central Rules, enacted under the authority of Entry 38 of List III (Concurrent List) of the Constitution of India, defined the requirements of a captive generating plant. They further asserted that there was no contradiction between the Central and State legislation and that any incidental encroachment was legally permissible.
The respondents maintained that the electricity tax demand was raised lawfully and did not infringe upon any fundamental rights or violate Article 14 of the Constitution.
The Court observed, "the only issue that arises for consideration in this writ petition is as to whether the respondents lacked power and jurisdiction to levy the shortfall towards electricity tax by invoking Rule 3 of the Central Rules on the ground that the captive generating plants fall short of 51% of the total generation."
Examining the Central and State legislations, the Court noted, "a captive generating plant is a power plant set up by any person to generate electricity primarily for his own use." It further observed, "Rule 3 of the Central Rules provides for the requirement of a captive generating plant and states that in case of a power plant, not less than 51% of the aggregate electricity generated in such plant, determined on an annual basis, should be consumed for captive use."
However, the Court found, "in both the State Act as well as the State Rules, the requirement of not less than 51% of the aggregate electricity generated in such plant being consumed for captive use is absent." It pointed out that the impugned demand notice was based exclusively on Rule 3 of the Central Rules, as reflected in the communication dated 23.3.2011.
Referring to the initial counter of the respondents, the Court recorded, "they took a stand that the Central Rules have been framed only for the purpose of carrying out the provisions of the Central Act and that they were not intended to be extended to impose an obligation for payment of electricity tax under the State Act, which does not stipulate such a requirement for captive generating plants."
The Court reiterated that the State's power to impose electricity tax arises solely from the State Act enacted under Entry 53 of List II. It stated, "the exclusive power available to the State cannot be effaced or watered down by a Central Enactment under the Concurrent List."
Discussing the constitutional framework, the Court noted, "Article 246(3) makes it clear that the State has the exclusive power to make laws for such a State or any part thereof with respect to any of the matters enumerated in List II in the 7th Schedule."
Regarding the respondents' reliance on the doctrine of pith and substance, the Court clarified, "the doctrine of pith and substance will be applied only if there is a conflict between two lists. That is not even the stand taken by respondents 1, 3 and 4 and for reasons best known to them, they raised the doctrine of pith and substance in the additional counter affidavit without any substance."
The Court found no statutory authority in the State law to enforce the 51% criterion and declared, "therefore, to apply Rule 3 of the Central Rules and impose tax on the petitioner, is illegal and beyond the power and jurisdiction of the respondents."
The Court issued the following directions: "Accordingly, the writ petition is allowed and the impugned demand notice dated 23.8.2012 issued by the fourth respondent is set aside."
It further clarified the scope of State authority as follows: "If at all any such power is available to the respondents under the State Act and the State Rules, it is left open to them to proceed further subject to the limitation period enumerated under the State Act."
Additionally, the Court recorded that: "No costs. Consequently, the connected WMP is closed."
Advocates Representing the Parties:
For the Petitioner: Mr. Krishna Srinivasan, Senior Counsel for M/s. S. Ramasubramaniam
For the Respondents: Mr. Haja Nazirudeen, Additional Advocate General assisted by Ms. P. Aishwarya, Government Advocate
Case Title: Hi-Tech Carbon (a unit of Aditya Birla Nuvo Ltd.) v. The State of Tamil Nadu & Ors.
Neutral Citation: 2025: MHC:1332
Case Number: WP.No.3472 of 2013
Bench: Justice N. Anand Venkatesh
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